Should central bankers be contemplating more quantitative easing? It is clear that many still are: even though the Bank of England kept rates on hold at this month’s policy meeting, many are anticipating further stimulus in August. The ECB and Bank of Japan continue to print money, while the Federal Reserve shows itself reluctant to raise rates again.
Certainly, this is a difficult economic environment, but UK bond yields are close to their lowest level ever. Can we really say that the current environment is worse than existing during the deflation of the 1970s, or two world wars, or the Cold War? In this context, Brexit seems little more than a hiccup.
There has been a sense with quantitative easing that it was storing up trouble further down the line, even if no-one was quite sure what that trouble might be. Most thought it might be inflation, but headline inflation numbers proved stubbornly low. In reality, it is inflation, but it is asset price inflation and the consequences have been far wider-reaching in terms of social upheaval than anyone might have guessed.
The Brexit vote, the rise of Trump and other phenomenon that suggest that large swathes of developed world populations are pretty irritated about the way the world is working for them, can be laid partly at the door of quantitative easing. The policy exaggerated the gap between the haves and have-nots to the extent that many have rebelled in spectacular fashion.
Equally, its success is questionable. Initially effective in shoring up consumer confidence and buoying stock markets, how much economic growth do we have to show for the trillions and trillions of quantitative easing across the globe? The transmission mechanisms have proved flawed. There is now a real question over whether further quantitative easing would shore up confidence, or simply perpetuate the sense of crisis. It is difficult to reassure consumers that everything is ‘OK’ if interest rates are at historic lows.
There may come a point when central bankers are deemed to have over-reached themselves. Many economists are suggesting that now is a time when fiscal policy has to take over and do some of the heavy lifting. Chancellor Philip Hammond has talked about a new era of fiscal policy, while Japan contemplates huge fiscal stimulus measures.
Central bankers have done their bit. It is now time for them to back away before their credibility is called into question.